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The Swedish state fund AP6 is scaling back its venture capital investments following instructions from the country's government to prioritise profits over developing small Swedish companies. It is a blow to the venture capital sector, which some have predicted will flourish in the wake of the crunch.

AP6 was founded in 1997 with a mission to put taxpayer funds to work helping smaller businesses in the country grow. But since then it has struggled to balance this obligation with pressure from politicians to generate returns. The fund manages Skr16.4bn (€1.6bn) in private equity and venture capital investments.

About 55% of the fund's portfolio is invested directly in companies, with turnover ranging from less than Skr100m to nearly Skr1bn. The other 45% is committed to a range of buyout funds with Nordic private equity firms like EQT, Accent Equity and CapMan.

AP6 says it generates about 20% a year from its overall portfolio but these returns have been offset to the tune of about 8% a year in losses at the smallest firms. In a statement yesterday, the fund described these as a "weight on its back" left over from the dot.com boom in the late 1990s.

As a result, in September Erling Gustaffson, the chief executive of AP6, called for a public debate on whether the fund should continue to support small Swedish enterprise, or chase returns.

A spokesman for the fund said today that it had now received its answer from finance minister Mats Odell: "He said it is OK for AP6 to not invest too heavily in these companies; we can invest in any companies, both smaller and larger, as long as we generate some profit."

AP6 will not disinvest any of its current money, but new capital and profits are likely to be committed to larger firms. There is not expected to be any immediate change in the mix between direct investment in companies, and investment in private-sector managers' funds.

Investing privately in early-stage and growth companies has long been regarded as riskier than investing in larger, more established firms - a mindset that became widespread during the middle years of this decade, when cheap debt fuelled a boom in large take-private deals.

But some funds-of-private-equity funds say they have detected a resurgence of interest in venture, following the end of cheap debt during the credit crunch.

Andrew Lebus, a managing partner at fund of funds Pantheon Ventures, told Financial News' sister-publication Private Equity News last week that his firm is now putting a record 10% of its money into venture.

Like most private-equity investors AP6 took a hit to its portfolio value last year, which fell by 16.6% after costs. Its long term return is better; having grown its initial Skr10.4bn to Skr16.4bn at December 31. The spokesman for the fund said 2009's returns would be positive, though the fund will not release detailed figures until after the year-end.